Digital advertising takes the lead – Dominated by Google and Facebook

The IAB just published its 2016 advertising revenue figures. It was a banner year with record setting revenues of $72.5 billion, 22% higher than last year. This makes digital advertising the number one advertising medium in the United States as TV advertising according to eMarketer came in at $71.3 billion. Seventy-five years after the first TV commercial and 25 years after television became the largest advertising medium, a new king of advertising has been crowned. We cannot underestimate the significance of this event. Advertisers demanding efficiency and effectiveness measurements have voted with their wallets to make digital advertising the biggest spend category. But even within digital advertising, we are seeing major shifts away from “traditional” desktop and fixed digital advertising towards mobile advertising. Growing from basically nothing ten years ago, mobile advertising is now a $36.6 billion segment and represents 51% of digital advertising

Ad Format in millions

2015 Revenue

2015 Share

2016 Revenue

2016 Share

Growth

Growth percentage

Search

$20,481

34.4%

$17,756

24.5%

($2,725)

(13.3%)

Classified & Directory

$2,757

4.6%

$2,345

3.2%

($412)

(14.9%)

Lead Generation

$1,756

2.9%

$1,989

2.7%

$233

13.2%

Mobile

$20,677

34.7%

$36,641

50.5%

$15,964

77.2%

Display

$13,881

23.3%

$13,790

$19%

($91)

(0.6%)

Total

$59,552

$72,521

$12,969

21.7%

Source: IAB 2017
What is hidden beneath the numbers is that mobile advertising is taking more than the entire growth of digital advertising. Advertising is clearly going where Americans are spending more and more of their time and where most of the data traffic is being consumed. Advertising is also moving into the segments dominated by Google and Facebook, which are dominating mobile advertising to a much greater extent than the fixed internet.
As we can see below, the combined share of Google and Facebook increased from 2015 to 2016 from 67.4% to 71.2% as the mobile strategy of both companies paid off. Google and Facebook, the two largest players, represented a combined 89% of the entire growth of the digital advertising market. The Herfindahl-Hirschman Index (HHI), a commonly used metric to measure market concentration, is well north of 3,000. Markets with an HHI of 2,500 or higher indicate high concentration. If the current trend continues, Facebook will have a higher market share by the end of 2017 for digital advertising than all remaining competitors, excluding Google, combined.

Ad Revenues in millions

2015

2015 Share

2016

2016 Share

Growth

Share of Growth

Google

$31,300

52.5%

$37,600

51.8%

$6,300

49%

Facebook

$8,900

14.9%

$14,100

19.4%

$5,100

40%

Everyone Else

$19,400

32.5%

$20,800

28.6%

$1,400

11%

$59,600

$72,500

$12,900

Source: Digital Content Next
Just as a comparison, another other big internet company, Netflix, had $5.1 billion is US sales in 2016 – the same amount by which Facebook grew in just one year – from 2015 to 2016. This demonstrates how significant advertising-driven digital businesses are in the TMT sector. Google and Facebook capture 89% of all growth in digital advertising, which impressively counters the Google narrative that “competition is only a click away.” While this might be true in theory; in reality when a company grows as fast as all other competitors combined, the narrative sounds hollow and self-serving. This is especially true when the only competitor that is half way keeping pace with Google – Facebook – does not rely on search engine recommendations for its traffic.
Even more concerning is the loss of diversity of sources of advertising revenues. In 2007, Google generated just over 60% of its advertising revenue from its own sites, showing a reasonably healthy advertising ecosystem when one considers that most of its advertising revenues came mostly from search. Ten years later, Google derives more than 80% of its advertising revenues from its own websites and services.

Global Revenue in Millions

2014

2015

2016

Google Properties

$45,085

$52,357

$63,785

Google Network Members

$14,539

$15,033

$15,598

Total

$59,624

$67,390

$79,383

Google Properties Percentage

75.6%

77.7%

80.4%

Source: Alphabet
The increasing percentage of Google’s revenue being derived by its own properties combined with very lackluster growth for non-Google properties raises questions of potential search engine bias or a precipitous decline in the ability of Google Network members to monetize their sites. Either way, it is not a healthy trend
As they have become increasingly successful and dominant, Google and Facebook have been able to increase their revenue per user. Google has increased ARPU by about a third, whereas Facebook has been extremely successful by more than doubling ARPU in the US and Canada within 24 months.

US/Canada ARPU

2014

2015

2016

Google

$9.59

$10.68

$12.76

Facebook

$9.00

$13.70

$19.28

Source: Facebook, Alphabet
Especially Facebook, which now considers all of its customers to be wireless users, has increased its ARPU into the range of a traditional prepaid wireless subscriber. We should consider these significant monetization advances by Facebook and Google combined with their wireless overlap. Verizon is planning to emulate this with its new Oath business unit – the combined AOL and Yahoo properties. Verizon will have the same reach as Google or Facebook with a programmatic advertising engine. The fundamentals are in place for Verizon to become a serious competitor to Google and Facebook. It all comes down to execution now.